MANAGED CARE July 2004

One auditor estimates that 3 percent to 10 percent of PBM claims
are processed incorrectly  always in favor of the PBM.

Wish List: 10 Things You Want From Your PBM

By Maureen Glabman

As the rising cost of health care continues to be a national concern, all
facets of pharmaceuticals, from manufacturing to distribution, are caught
squarely in the health care klieg light. Pharmacy benefit managers, which
process about 75 percent of the more-than-3 billion prescriptions dispensed
annually in the United States, are under increasing pressure to reveal revenue
sources and cut prices.

In April, the National Association of Attorneys General reported that 20
states, including California and New York, resolved claims against Medco, the
nation's largest PBM. Medco will pay $29.3 million to settle claims that it
switched prescriptions to drugs that would increase manufacturer rebate
payments, thus increasing the PBM's income. The company claimed that drug
switches would save money for patients and health plans, but the attorneys
general asserted that the switches actually increased costs.

But much of the pressure on PBMs derives not only from politicians, state
attorneys general, and consumers, but also from those who pay most of America's
drug tab  health plans, employers, unions, Medicare and Medicaid managed care
plans, and the Federal Employee Health Benefits Program.

These PBM clients are suffering a crisis in confidence in light of an
estimated 30 major lawsuits filed against PBMs in the last two years by
attorneys general, employer groups, and pharmacies over drug switching programs,
manufacturer rebates, and "spreads." In 2002 and 2003, 30 state legislatures
introduced bills to regulate PBMs or require the disclosure of financial
agreements with drug manufacturers.

"We're in a very chaotic time in the PBM industry," says Gerry Purcell, a
former sales manager at Consultec, an Atlanta-based, independently owned PBM,
who now advises government representatives and employer groups on PBM inner
workings. Some plans have requested significant changes in PBM business
practices, unheard of over the course of the history of the 25 year-old PBM
industry. And PBMs themselves have begun to question their own business model.

Numbers game

Mergers have nearly cut the number of PBMs in half , from
more than 100 five years ago to about 50 today. The largest of the recent
mergers consolidated Caremark Rx with AdvancePCS. Mergers or no mergers,
here are some of the realities that PBMs either help create or must live
with.

"Awkward position"

"Now is the time for PBMs to re-evaluate their sources of revenue and assess
whether too great a percentage ... comes from manufacturers through not just
rebates, but the sale of data, funding of clinical programs, mail order
services, therapeutic-switch programs and research grants," writes Tim Dickman,
CEO of Prime Therapeutics, in an editorial published last year in Risk
Insurance. These revenue streams "put PBMs in the awkward position of questioned
loyalty ... whom do we really serve  health plans, payers or members, or drug
manufacturers?" Prime is a St. Paul PBM associated with nine Blue Cross Blue
Shield plans or their parents, subsidiaries or affiliates covering more than 9
million members.

Plans rely on PBMs because they have the infrastructure, with claims
processing, pharmacy benefit cards, preferred pharmacy networks, mail order,
formularies, and the savvy to exact big discounts from drugmakers. PBMs are
supposed to obtain better pricing than if plans contracted with individual
manufacturers. However, litigants charge that PBMs may sometimes steer consumers
to expensive medications.

The health plan-PBM relationship is a MarsVenus issue. They are two entities
are wired differently; their goals are not aligned; their missions are contrary.
PBMs want consumers to use more medication because they are paid by
prescription; plans want less medication dispensed to keep costs down . Still,
these divergent interests are forced to work together because, as one PBM
consultant noted, "there isn't a lot of choice unless a company is big enough to
start its own PBM."

If plans had the liberty to fully dictate terms to their PBMs, the
relationship would be altered drastically. In what follows, several PBM
executives, health plan pharmacy administrators, and other industry insiders
tick off the 10 most important things they would change.

1. Make full disclosure

PBMs typically receive 6 percent to 25 percent off the average wholesale
price (AWP) of drugs, according to government and industry sources. But they
pass along only 5 percent to 8 percent to plans. Plans want rebates exposed or
made "transparent" so they know whether a PBM is promoting a particular drug in
their best interest or in the PBM and drugmaker's best interest. They also would
like a bigger share of the rebates.

PBMs serve two interdependent masters, the drugmaker-suppliers who pay for
preferred treatment on PBM formularies, and the plans that pay PBMs for
providing member medication. This conflict of interest is the source of the most
contentious issue between plans and PBMs. Should PBMs divulge drugmaker rebates?

PBMs insist that secretly negotiated rebates are necessary to obtain the
lowest prices for plans. If the rebates are exposed, the companies could lose
their competitive edge against other PBMs. Drugmakers would be able to know a
PBM's negotiating and pricing strategies with other drugmakers, which in turn
would drive up prices.

"If a PBM has negotiated a rebate from Pfizer for the cholesterol lowering
drug Lipitor and the amount of that rebate is known, it could interfere with the
same PBM trying to negotiate a discount with Bristol-Myers Squibb for a similar
drug, Pravachol," says Edward Armstrong, an associate professor in the college
of pharmacy at the University of ArizonaTucson.

PBMs are going to great lengths to protect rebate deals from disclosure.
Earlier this year, the Pharmaceutical Care Management Association, acting on
behalf of the industry's largest companies  Caremark Rx, Medco Health
Solutions, and Express Scripts  won an injunction to block a Maine law that
would force PBMs to pass volume drugmaker discounts to consumers. PCMA claimed
it violated trade secret protections.

Nonetheless, an open governmental assault on rebate disclosure continues.

Publicized lawsuits against PBMs sparked state attorneys general to wonder
whether their Medicaid programs were receiving the lowest priced drugs, as
required by statute. Several states have tried to force PBMs to reveal their
rebate relationships to assure best prices.

Thirty state legislatures have introduced bills that would regulate PBMs,
some specifying rebate exposure.

The Office of Inspector General will probably require rebate arrangement
information from PBMs involved in the new Part D Medicare drug benefit when
rules are proposed later this year.

Apparently in an effort to stave off mounting cries for transparency, Medco
agreed earlier this year to pass along its full discount to a Towers
Perrinorganized employer coalition.

Some TP clients will pay Medco a flat rate based on the number of members.
Other PBMs may follow if plans force the issue, according to news reports. TP
refused to comment on the deal.

Industry insiders are suspicious of the announcement, claiming that PBMs will
go underground, hiding rebates from clients and auditors behind euphemisms such
as "educational grants, data sales fees, academic detailing, performance fees,
or health management fees," according to one auditor, Susan Hayes of Pharmacy
Outcomes Specialists in Lake Zurich, Ill. In the past, even PBMs that said they
would allow auditors to review rebate information put up roadblocks.

"I've done audits where full disclosure was promised. The PBM did not follow
through. We were limited and hampered in every way possible," Hayes says.

2. Design formularies without respect to rebates

PBMs use formularies to encourage the use of specific branded or generic
drugs that are typically the basis for rebates and administrative fees paid by
manufacturers, according to a June 2001 HCFA (now Centers for Medicare &
Medicaid Services) study of the PBM industry by PricewaterhouseCoopers and a
2003 Centers for Medicare & Medicaid Services report.

PBMs are supposed to push less expensive drugs. But formulary drug selections
are made by how much manufacturers are paying PBMs to recommend them. "If
rebates were not a factor in driving overall low net costs, some drugs would not
make it on the formulary at all," says Dickman, of Prime Therapeutics.

If new drugs are on the formulary, plans want "transparency" to confirm that
they are less expensive than other drugs already on the market, says Michael
Deskin, president of Pharmacy Benefit Management Institute, a Tempe, Ariz.
educational and consulting service for plan sponsors.

3. Offer short-term contracts

Until a few years ago, one-year PBM contracts were available to plans, says
Gerry Purcell, the Atlanta consultant. Today, PBMs demand three-year agreements,
with some for five or even seven years. These often come with early-termination
penalties. Longer contracts help the PBM recover the expense of loading plan
member eligibility onto PBM software, system changes, and staffing costs.

Plans cannot predict whether things will go well and want the ability to get
out early if the PBM causes them to lose money. "I don't want a three-year
contract if I have issues  if the PBM continues to give medications to people
who shouldn't get them, if people are getting more expensive drugs, if the cost
of drugs is calculated incorrectly, if some drug quantities are limited and
patients are getting more than they should," says Tim Sawyers, director of
clinical pharmacy management at AvMed Health Plan in Gainesville, Fla., an HMO
with 200,000 covered lives. "Some PBMs fail to execute step therapy edits,
formulary restrictions, and prior authorizations. If you can't resolve issues
except in a court of law, you're stuck with the PBM for three years. To end
contracts for cause often requires arbitration; it's hard to get out of them."

If plans suspect that claims are not being processed properly, they can hire
an auditor. Susan Hayes has conducted more than 300 PBM audits in eight years.
She finds 3 percent to 10 percent of PBM claims are processed incorrectly,
always in the favor of the PBM, "never in favor of the client."

But PBMs force audits to be expensive and restricted. Often PBM contract
language permits only big accounting firms to conduct them. "Those cost $100,000
to $150,000, which is deliberately prohibitive," Hayes says. Hayes, who has a
small auditing company, charges $25,000 to $50,000 for a standard audit of one
plan that has 500,000 covered lives. "We can charge less because we know exactly
what to look for and do not have a learning curve," she says.

With the rising cost of pharmaceuticals and the lawsuits against the PBMs,
the number of audits is rising. In 1998, Hayes's company performed 20 audits
annually. Last year, the company was hired to do 50. And employer groups that
have used PBMs for 20 years and never hired an auditor are requesting them.
"Usually we find more discrepancies if they've never been audited," Hayes says.

4. Renounce a "spread" on the pharmacy network

Spread refers to two things: the cost of drug ingredients and dispensing
fees. Sometimes, PBMs take a cut of one; sometimes a cut of both. Plans do not
want PBMs to take cuts of either. More and more, they are requesting
transparency on this issue as well.

In the first instance, spread is the difference between what PBMs charge the
plans for drug ingredients and what PBMs pay pharmacies for the same
ingredients. For example, a study reported that some PBMs billed plans $80 for
the hypertension drug atenolol, 100 mg, 90 pills, but paid pharmacists only $7,
keeping a $73 "spread."

The study was published in the January/February 2004 issue of the Journal of
the American Pharmacists Association.

In yet another odd example, PBMs billed plans $29 for 30 tablets of another
hypertension drug, monopril 40 mg, and paid the same $29 to pharmacists for a
spread of zero. Several states are reviewing spreads. Vermont's state auditor,
for example, found that Express Scripts of St. Louis, the state's PBM plan
administrator, paid pharmacists $4.02 for the acid reflux drug ranitidine, then
billed the state $8.49, a profit of 111 percent. The auditor has asked the
state's attorney general to consider an investigation of the PBM.

Terry Latanich, Medco's senior vice president, called the JAPhA study flawed
in an opinion piece that appeared in the same issue. He objected that only 129
claims were reviewed from six pharmacies in only a handful of states. Moreover,
Latanich wrote, "PBMs operate on a very narrow margin in a highly competitive
market," with after-tax income only 1 percent to 2 percent.

In the second instance, spread is the difference between what the PBM charges
plans for dispensing and what it pays pharmacists for dispensing. Typically,
PBMs charge $2 for dispensing a single prescription but pay pharmacists only
$1.50, keeping a 50-cent "spread." If the PBM processed 1 million prescriptions,
it would earn $500,000. The benefit managers explain that it costs them time and
money to set up and maintain prescription networks and so they feel that they
are entitled to the spread for administrative costs.

Moreover, PBMs argue that if they did not have spreads, they would lose a
revenue stream. But they also earn substantial income from selling marketing
data to drugmakers. For example, Aventis Pharmaceuticals received regulatory
approval earlier this year for Ketek, the new antibiotic that treats pneumonia
typically acquired by those over age 40. For target marketing purposes, Aventis
may go to PBMs and request information about which geographic area of the
country has the largest number of patients over 40 who purchase the largest
quantities of competing drugs  Levaquin, made by Ortho-McNeil, or Avalox, made
by Bayer  for target marketing.

5. Be aggressive on MAC

The federal government developed "maximum allowable cost" pricing for
Medicaid and for federal employee health programs. It applies to a blended price
of several generic drugs that treat the same condition. A MAC price may be
created when a new drug comes off patent and several manufacturers create
generic equivalents. The prices of the generic equivalents are averaged to
produce a MAC.

PBMs lure plan business by boasting that they have better MAC pricing than
the federal government, such as more than 60 percent off the MAC, which is
considered aggressive.

But some experts charge that the government's MAC is a better value than the
MAC paid by plans, and that MAC prices are not far from the cost of branded
equivalents. But it is only a suspicion. Often, when plans ask to see the MAC
list, PBMs refuse, calling the lists "proprietary" even though plans are paying
for drugs using the PBMs' MAC, says Hayes.

"You can't go into Marshall Fields and buy a dress without a price tag and
have Marshall Fields say, 'You will find out what it costs when you get your
VISA statement. We can't tell you because we don't want Nordstrom to know what
we are charging for the same dress,'" Hayes says. "That's what PBMs are doing to
plans when they won't disclose the MAC list." Some plans require MAC pricing
disclosure in their PBM contracts.

6. Follow court precedents

In light of litigation issues that have surfaced, plans have begun to
stipulate performance guarantees based on what has come out in the press. "We
want to know that whatever is being litigated will not happen to us," says Kaye,
of Passport Health. Requested contract language includes confirmation that PBMs
will not toss out dated prescriptions, "short" prescription orders, switch drugs
without physician orders, and more.

Among the most notable of the lawsuits: The U.S. Justice Department filed
civil charges against Medco last year contending that the company cheated the
Federal Employees Health Benefit Program and other government plans by
canceling, deleting, or throwing away thousands of mail order prescriptions to
meet contractual performance guarantees, falsified records, changed
prescriptions, and switched patients to Merck drugs (Medco is a Merck spin-off)
even when Merck drugs were more expensive. Medco is accused of violating fraud
and anti-kickback statutes as well as the False Claims Act. The company denies
the allegations.

7. Provide consumer tools

Educate members to choose less expensive medications that do not have
clinical drawbacks. Members are now more open to these moves than ever before
since plans increasingly put more of the drug cost-sharing burden on them
through medical savings accounts, tiered drug payment structures, higher drug
copayments, and waiver of copayment or coinsurance for generics. "Patients need
to know the economic consequences of their choices," says Dickman, of Prime
Therapeutics.

Last year, Prime started myrxhealth.com, which has a simple-to-use method of
finding out what drugs have generic equivalents and the costs of alternatives.
For instance, if you look up the biggest selling U.S. branded product for
cholesterol, Pfizer's Lipitor, the site lists eight "similar drugs" (other
statins)  seven branded products and generic lovastatin. In 10 milligram
dosages, 30 Lipitor tablets cost $71.63; lovastatin rings up at $28.

The site also lists benefits and contraindications of each medication.

On April 29, CMS started to offer a link on its Web site to help consumers
find a Medicare discount card that suits their drug expenses. It also allows
patients to compare the prices of medications.

8. Be responsive

PBM account managers are among the most important people in the PBM-health
plan relationship. If they leave the PBM or become promoted, sometimes new,
untrained managers have large learning curves that can cause plans to lose
money.

For instance, AvMed Health Plan in Florida has 200,000 covered lives and pays
for 1 million prescriptions annually. Clinical pharmacy director Tim Sawyers
tells of a new benefit manager for AvMed's unnamed PBM.

Somehow, the PBM's computer lost copayment restrictions on AvMed drugs.
Several hundred drugs previously covered with a high nonpreferred copayment were
suddenly available to members for a three-week period at a low copayment before
the plan was notified.

"A trained account manager could have figured it out sooner," Sawyers says.
The plan found itself in the awkward position of telling patients that
medications they received could not be refilled for the previous lower
copayment.

Sawyers adds that untrained account managers sometimes fail to add policy
changes, known as "benefit designs." Among them: new copayment structures,
coverage for generics only, and step therapies. Failure of any, some, or all of
these cause plan dissatisfaction and increase plan costs.

"If you always have to look over your shoulder, then it's time to gain
control by bringing pharmacy in-house," Sawyer says. This is one reason AvMed,
like other plans, is considering bringing PBM functions inside.

9. Offer choice in pharmacy networks

Most PBMs maintain associations with major drug chains and independent
pharmacies so that patients are not inconvenienced by having to change
pharmacists with a new plan. However, some PBMs offer discounts if plans accept
a smaller network of pharmacies. "Clients have to decide if cost or
accessibility is more important. There is a trade-off," says Dickman, of Prime
Therapeutics. "In some urban areas like Chicago, there could be 10 pharmacies in
a one-mile area, so it is not a problem to cut that accessibility in half and
still provide convenient access to a pharmacy."

10. File useful utilization reports

Plans would like PBMs to put online edits into software in a timely manner,
such as if they suddenly decide to require prior authorization for those over
age 18 to receive attention-deficit-disorder drugs or if lifestyle drugs are no
longer covered. They also want members added or removed within 20 to 30 days of
the change in status  new patients don't have to wait for medication pick-ups
and so clients don't receive calls from angry members.

And, finally, plans need timely utilization reports detailing: What are the
top 100 drugs ordered by members? Who are the top patient utilizers? Where are
the major dispensing pharmacies? Who are the largest prescribing doctors? Who is
using the most medications by age and geography? Are branded medications ordered
more than generics? Are less expensive mail-order prescriptions growing?

Despite some dissatisfaction, PBMs do seem to be doing the job for their
clients. A 2003 survey of 468 employer groups conducted by the Pharmacy Benefit
Management Institute rated "the delivery of promised PBM services" an average of
7.6 out of 10.

Maureen Glabman, of Miami, is the 2000 Columbia University
Reuters Fellow in Medical Journalism.